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Sunday, June 06, 2010

India's Reliance Communications Ltd. and U.S. telecom giant AT&T Inc. have sounded out each other's interest about a potential transaction in which AT&T would take a significant minority stake in the Indian cellphone company, according to people familiar with the matter.

Your Directors have great pleasure in presenting the Sixteenth Annual
Report on the business and operations of your Bank together with the
audited accounts for the year ended March 31, 2010.

FINANCIAL PERFORMANCE

(Rs.in crores)
For the year ended

March 31, 2010 March 31, 2009

Deposits and Other Borrowings 180,320.1 151,975.2

Advances 125,830.6 98,883.0

Total Income 19,980.5 19,622.9

Profit before Depreciation
and Income Tax 4,683.5 3,659.2

Net Profit 2,948.7 2,245.0

Profit brought forward 3,455.6 2,574.6

Total Profit available for
Appropriation 6,404.3 4,819.6

Appropriations

Transfer to Statutory Reserve 737.2 561.2

Transfer to General Reserve 294.9 224.5

Transfer to Capital Reserve 199.5 93.9

Transfer from Investment
Fluctuation Reserve (1.5) (13.9)

Proposed Dividend 549.3 425.4

Tax Including Surcharge and
Education Cess on Dividend 91.2 72.3

Dividend (including tax/cess thereon)
pertaining to previous year paid
during the year 0.9 0.6

Balance carried over to Balance Sheet 4,532.8 3,455.6

- Change pursuant to reclassification

The Bank posted total income and net profit of Rs. 19,980.5 crores and
Rs.2,948.7 crores respectively for the financial year ended March 31, 2010
as against Rs. 19,622.9 crores and Rs. 2,245.0 crores respectively in the
previous year. Appropriations from net profit have been effected as per the
table given above.

DIVIDEND

Your Bank has had a consistent dividend policy that balances the dual
objectives of appropriately rewarding shareholders through dividends and
retaining capital, in order to maintain a healthy capital adequacy ratio to
support future growth. It has had a consistent track record of moderate but
steady increases in dividend declarations over its history with the
dividend payout ratio ranging between 20% and 25%. Consistent with this
policy, and in recognition of the Bank's overall performance during this
financial yearyour directors are pleased to recommend a dividend of Rs. 12
per share for the financial year ended March 31, 2010, as against Rs. 10
per share for the year ended March 31, 2009. This dividend shall be subject
to tax on dividend to be paid by the Bank.

Investors with a two-year perspective can retain their exposure in the Voltas stock at the current price of Rs 185. The company has reported a 19 per cent sequential jump in its order book in the March quarter after six quarters of sluggish order inflows and declining order book, pointing to a revival in the domestic and international business.

The order book now (Rs 4,700 crore) however is just 1.5 times the revenues of (the MEP — mechanical, electrical and public health — business) last year.

Recovery in the Middle East market is at its nascent stage; order flows need to continue on a robust note in the coming quarters to bring the company back on a strong growth trajectory.

Post declaration of its FY10 results last week, the stock has made considerable gains (up 8 per cent). At the current market price the stock is trading at 18 times its FY10 earnings; the stock has been trading at a PE band of 16-23 times historically.

Middle East matters

Close to 60 per cent of Voltas' revenue is from the MEP business, which draws much of its orders from the Middle East market — United Arab Emirates, Qatar, and Bahrain. Though oil prices have recovered from lows of 2009, the economic situation in the Middle East is not yet out of the woods.

This will be an impediment to growth and offtake of infrastructure and construction projects in the medium term.

Voltas' revenues from the Middle East have grown at a CAGR of 60 per cent between 2004-05 and 2008-09.

Revenues have been multiplying following the company's acquisitions and JVs and its growing market share. In May this year again, the company entered into a JV with an electronic and industrial products major in Oman, Mustafa Sultan Enterprises LLC. This will give further traction to the company's Middle East business in the coming quarters.

In the domestic market, the acquisition of 51 per cent stake in Rohini Industrial Electricals in September 2008 helped the company widen its business to include electrical and instrumentation projects in the cement, steel, power and oil and gas sectors .

In the first half of FY10, the MEP revenues (domestic plus international) grew at double digit rates (revenues were up over 30 per cent).

However, there was a slowdown in the second half following a lull in capital spending in user industries, and the MEP division closed the year with just 13 per cent growth in revenues.

The MEP business' carry forward order book has been on a decline from the quarter ending June 2008. The value of outstanding orders dropped from Rs 5,675 crore in end-March 2008, to Rs 4,666 crore in end-March 2009 and to Rs 3,964 crore in end-December 2009.

This makes a point that the order flow has been sluggish for almost two years now; the robust numbers of FY09 (MEP revenues up 59 per cent) are largely the result of orders won before the slowdown.

Cool show

Air-conditioners and commercial refrigeration products which make up the company's ‘Unitary Cooling' division witnessed a robust growth in 2009-10. This segment's revenues (25 per cent of the total) reported a growth of 29 per cent in 2009-10 and 72 per cent for the March 2010 quarter.

Voltas launched 50 new models (including the Gold, Platina and Plus versions of Vertis) in room air-conditioners for the 2010 summer with wide choices in features, price and tonnage.

Going ahead, contributions to the top-line from this segment are poised to increase with demand for air-conditioners on the rise in the domestic market.

Engineering reviving

Over the last two quarters there has been a pick up in the orders for textile machineries and mining and construction equipments. However, it hasn't yet translated into revenues for the company. The Engineering Products and Services division saw revenues fall by 14 per cent for FY10 (revenues down 3 per cent in the last six months of FY10).

Margins improve

Profit growth in FY10 outpaced top-line growth. With an 11 per cent growth in sales for 2009-10, Voltas managed a 51 per cent growth in net profits, thanks to the improved profit margins. Efficiency in cost management and fall in the cost of raw materials (raw material cost as a percentage of sales dipped to 47 per cent from 54 per cent in FY09) helped margin expansion at the operating level.

Operating profit margin expanded to 9 per cent in FY10 from 6.8 per cent in FY09. Voltas is quite comfortable on the debt front too. The company's debt-equity ratio stood at 0.2 in FY09. With interest expenses dropping by 23 per cent in 2009-10, outstanding debt can be assumed not to have increased.

Investors with a medium-term perspective can buy the stock of textile-and-retail player, Page Industries, trading at Rs 850, at 24 times its trailing 12-month per-share earnings. The stock lacks direct comparables, whether in the textile or retail space. Still, closest comparable Maxwell Industries trades at a discount to Page.

We had given a ‘buy' call on the stock at Rs 710 in early December 2009, when the stock was trading at 22.6 times the trailing 12-month per share earnings. The company has since clocked a 40 per cent growth in sales (for the second half of 2009-10), while profits grew 30 per cent.

Our recommendation is also supported by Page's sustained financial performance, good brand presence in a niche market, multiple product lines, vast geographical reach and good dividend payouts. Investors with moderate return expectations can buy this stock.

Product lines

Innerwear for men and women is the primary product line. To mitigate risks of product concentration, Page branched out into leisure wear and thermals for men and women. Both innerwear and leisure are collectively sold under the Jockey brand.

The product range is in a mid-to-premium band, providing it with the ability to make the most of the vast market of both the value-conscious and the lifestyle consumers. Product depth in innerwear is also quite strong, and it is the innerwear segment that accounts for majority of revenues.

The apparel market is dominated by menswear, though women's wear is a fast-growing segment. Menswear currently makes up more than half of revenues for Page. However, with established product lines in both categories, the company is well-placed to make the most of the dominant and growth segments.

Page has the licence to market the Jockey brand in Bangladesh, Sri Lanka and Nepal. However, revenues from exports are still negligible and are unlikely to be a revenue driver even in the coming quarters.

Page has production capacities for garment and elastic manufactures, which allow cost-controls leading to better operating margins. Manufacturing capacities have increased significantly, post the infusion of funds raised from its initial public offer in 2007.

Brand and retail reach

A key factor supporting Page is the strong brand recall that Jockey commands, especially in the mid-priced everyday innerwear segment, and compared with other international brands.

The company also benefits from the technological and design support of Jockey International. Additionally, Page benefits from the non-discretionary nature of its primary product offering and its presence in the value-for-money segment. However, the company aims to scale up leisure wear as a lifestyle brand, besides pushing sales in its premium category, both of which may be a tad difficult to achieve given its mid-priced foothold.

Another factor buoying sales is the extensive reach of Page's products. Page retails through its own exclusive branded stores, a whole host of multi-brand outlets such as Shoppers' Stop and Lifestyle, and finally through regular hosiery stores. Its retail network thus spans over 17,000 outlets in more than a thousand cities, up from the 14,000 two years ago.

Such a vast reach indicates its ability to address a wide customer space and mitigate risks of area concentration. Even with its exclusive outlets, stores are quite evenly distributed in the north, west and southern zones.

Current-owned store count stands at 55, up from the 43 at the end of FY-09. Plans are on reach a store count of 100 by the end of FY-11. With debt-equity on the lower side at 0.5 times, bankrolling such expansion may not be hard to come by.

Financial performance

Over a three-year period, sales clocked a 36 per cent compounded annual growth while net profits grew at 33 per cent. Sales in FY-10 grew 33 per cent over the figure in FY-09, while net profits posted a 26 per cent growth.

Operating margins stood at 21 per cent for FY-10. Margins are a shade lower than the 22 per cent of FY-09, on the backs of higher raw material costs. With cotton prices on an upswing, margins are likely to come under further pressure. Even so, margins are substantially higher than most retailers.

Depreciation costs have also been on the rise, as a result of significant capacity expansion, more than doubling from FY-07. However, depreciation as a percentage of sales has remained more or less constant at 2-2.5 per cent, implying that capacity addition has at least contributed to sales. Net margins have hovered around 12 per cent over the past three years. Given its low debt, interest costs do not drag earnings and margins; interest cover is healthy, having been maintained at over 10 times for the past three years.

Investors with a two-three-year perspective can consider limited exposure to the stock of ABG Shipyard. Lull in order flows, slower execution pace and liquidity issues, as a result of severe cash crunch faced by shipowners globally led to Indian shipyards being de-rated from an average price-earnings multiple of 12-18 times to less than five times.

However, with an order backlog of 5.2 times FY-10 sales and nil order cancellations in the worst of times, ABG Shipyard has also shown more indications of pick-up in execution pace and order flows compared with other players.

A superior order mix, quicker revival in earnings and additional rig facilities to cater to the offshore market make this stock a superior option in the Indian context. However, given that shipbuilding as a sector is not fully out of the woods, ABG Shipyard may at best be a dark horse play. Investors with some risk appetite can consider exposure to the stock.

At the current market price of Rs 250, the stock trades at about 5.5 times its estimated per share earnings for FY-11. This does not factor in any revenue potential from its subsidiary, Western India Shipyard, a loss-making ship repair entity that ABG acquired under a scheme of arrangement. However, ship-repair business could fetch lucrative operating margins of 25-30 per cent.

Indian edge

While lower order cancellations and improved execution pace are likely to provide relief for shipbuilders worldwide, orders may take time to pick up as revival across the globe remains painfully slow.

However, Indian shipyard players stand differentiated for three reasons: They hold a more diversified order book across segments compared with their South Korean and Chinese counterparts. Indian players most often gain repeat orders, thereby reducing risks of cancellations.

With improved capacities, Indian players would be better placed to take orders for larger-sized vessels that may provide better profit margins.

Chinese and South Korean shipbuilders — leaders in shipyards — have been concentrating on dry and wet bulk carriers and containership segments. Globally, a majority of sea-borne trade happens in the dry bulk carrier segment. However, as demand for dry bulk commodities such as coal and iron-ore is largely perceived to be driven by China, the outlook for this segment remains muted.

Interestingly, according to a CARE Research Report on the Global Shipbuilding Industry, Indian shipbuilders have diversified by constructing offshore and specialised vessels.

When viewed in terms of volume (dead weight tonnes), dry bulk account for 82 per cent of Indian players' order composition as a result of the larger size of dry bulk vessels.

However, in terms of number of vessels, offshore and specialised vessels account for a good 52 per cent of Indian players' order book as against 35 per cent of dry bulk.

In contrast, offshore and specialised vessels accounted for just 9 per cent (in terms of number of vessels) of China's order book and 5 per cent of Korea's orders.

It is, perhaps, this diversified profile that has provided some cushion to Indian players. ABG, for instance, witnessed a 37 per cent growth in revenues annually over the last two years, while net profits expanded by 14 per cent over the same period.

Offshore opportunity

Offshore vessels could also be an area that holds prospects over the long term. According to reports, close to 50 per cent of offshore vessels are over 25 years of age and need replacement.

Recent incidence of oil spill puts forth the need to have double hulls to reduce the impact of such accidents on the marine ecology.

Indian shipyards specialise in the construction of offshore vessels. For instance, ABG shipyard has a rig facility in its existing yard to cater to the increasing demand in this space. Besides, Indian shipyards have also been promised orders (for both public and private companies) by Defence, partly to combat recessionary times. Companies such as Larsen & Toubro have already been recipients of such orders.

Why ABG?

ABG Shipyard, Bharati Shipyard and Pipavav Shipyard are the three major players in the shipbuilding industry in India, aside of L&T's Greenfield project.

ABG tops the list in terms of volume of order book (86 as against 42 for Bharati).

While Pipavav holds larger capacity, the company has already faced order cancellations and is re-negotiating terms for a number of other orders, thus adding uncertainty on the revenue front.

The Bharati Shipyard stock has traditionally suffered a discount to ABG as a result of its high gearing.

While the company's recent stake in Great Offshore has brought with it business opportunities (and debt) in the offshore segment, its inability to bag orders in the mainstream business in recent times is a cause for worry.

The company is also reported to have taken a German customer to court after the latter cancelled an order.

ABG, on the other hand, has managed to get orders for cement carriers recently, thus bringing some relief on the order flow front.

Besides, the company has ramped up execution pace significantly, suggesting that clients have not been requesting for postponement of delivery.

The company delivered 17 vessels in FY-10 as against just six in FY-09. This increased execution also means that cash flows from clients would flow in at a faster pace.

For the full year ended FY-10, ABG's sales grew 28 per cent to Rs 1,807 crore while net profits expanded 22 per cent to Rs 208 crore.

However, for the March quarter, operating profit margins, excluding subsidies, fell sharply by 5 percentage points to 13.5 per cent over the previous quarter, suggesting that raw material costs are beginning to hurt once again.

As shipbuilders tend to have adequate stock of raw materials such as steel, there may not be too much volatility in input costs for a few quarters.

With debt of Rs 2,500 crore, ABG's debt-equity ratio has become more risky at 2.5 times. However, this appears to be largely a result of slower execution pace, which means longer periods of guarantees and higher working capital cycle.

With execution pace picking up, this may be expected to decline. Fund flows from clients such as Essar (financial closure being over) may help tide over immediate concerns.

IVRCL Infrastructures & Projects (IVRCL) has mitigated the risk of slower pace of project execution in Andhra Pradesh through robust order intake in other segments such as roads. Stability in operating profit margins and significant progress in subsidiary-held BOT projects are also likely to help earnings traction. Investors with a two-year perspective can consider investing in the stock. At the current market price of Rs 177, the stock discounts its likely per share earnings for FY-12 by 13 times. Investors can consider accumulating the stock in small lots on declines linked to broad markets.

IVRCL ended the year on a modest note as sales for FY-10 grew 10 per cent and net profits declined 6.6 per cent as a result of higher interest and tax charges. However, the company demonstrated improvement in revenue and earnings growth in the quarter ended March 2010. More positively, after almost eight quarters, the company's operating profit margins at 10.5 per cent, moved to double-digit once again. As commodity prices have been creeping up again, clearly, better project mix, rather than lower input costs have resulted in the profit margin improvement.

IVRCL suffered from project hold-ups last year. The pace of execution in Andhra Pradesh, a key contributor to revenues, suffered setbacks as a result of political problems within the State. To combat this, IVRCL diversified into other regions and business segments. It ramped up significantly its presence in road projects through its subsidiary IVRCL Assets & Holdings. Parent IVRCL executes road contracts for the subsidiary. This reduced its order backlog in Andhra Pradesh to 16 per cent of the total Rs 24,500 crore of orders to be executed. This figure stood at 24 per cent in the December quarter. Besides, as a good number of road projects have been recently commissioned, revenue from this stream is likely to ramp up significantly for the group in the upcoming quarters. Some of the irrigation projects in Madhya Pradesh were also stalled pending clearances. These have now been resolved.

As a result of slower pace of execution and resultant increase in working capital, interest cost for FY-10 shot up by 25 per cent. With improvement in execution, this concern too would be addressed. IVRCL's funding requirements for its subsidiary may not be too high given that all but two of the projects are pending financial closure.

The biggest positive for IVRCL in recent times is its strong order intake. The company's order intake increased three-fold to Rs 5,760 crore in the March 2010 quarter over a year ago period as a result of bagging a number of road projects. With these, the current order book at 4.4 times FY-10 sales is far higher than the average three times seen in recent years.